Bank Indonesia Committed to Maintain Policy Rate Through Third Quarter

A worker sweeps the floor near the gate of Bank Indonesia Headquarters in Jakarta in this file photo. (Bloomberg Photo)

Jakarta. Bank Indonesia is committed to keeping its benchmark interest rate at 7.5 percent through the third quarter this year in order to prevent the current-account deficit from widening.

“The challenges to Indonesia are still there, particularly the current-account deficit,” Mirza Adityaswara, senior deputy governor of Bank Indonesia, told reporters at the House of Representatives in Jakarta on Monday.

Mirza, who filled the vacancy just six month ago, sees his term end on July 14.

The House’s banking and financing commission conducted his fit-and-proper test for his second term on Monday.

Finance Minister Chatib Basri said last week the shortfall in the current account would widen to almost 4.4 percent of the country’s gross domestic product in the second quarter, from 2.06 percent in the first quarter.

“The third quarter [deficit] will still be bigger than the first quarter,” Mirza said.

He attributed the deficit to high oil and gas imports, as well as raw material and machinery purchases fueled by company expansions that are usually realized in the third quarter.

Mirza said economic growth in the country would likely remain slow as a result of high interest rates.

The Indonesian economy expanded by 5.2 percent in the first quarter, its slowest pace in more than four years.

Overseas debt rose 8.7 percent to $276 billion by the end of March compared to the same month last year, with private debt rising 12 percent to $146 billion over the period, central bank data showed.

Countries with current-account deficits rely on overseas debt to pay for imports as they don’t get enough income from exports.

Economists in Jakarta have expected Bank Indonesia to let the rupiah weaken in order to make imports more expensive and in turn curb domestic appetite for goods from abroad .

The country’s foreign exchange reserves rose to $107 billion in May from $105.6 billion in April, according to data from Bank Indonesia, signaling the central bank’s lack of resolve in propping up the currency.

The rupiah has declined by 3.3 percent against the dollar since April 1, this year’s strongest level. The currency strengthened by 0.3 percent on Monday to trade at 11,790 against the greenback.

Recent plans by the central bank proved to have had an impact. Annual retail sales growth slowed in April to 16 percent from April last year, after a 17 percent growth in March, a Bank Indonesia survey showed on Monday.

By Ridho Syukra on 10:05 pm Jun 09, 2014